Pradeep Kumar Mohata, CHENNAI V. ITO, CHENNAI

ITA 103/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4038 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 19-06-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 13-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SREENIVASAN JCIT D R
• Keywords: Business income; Salary income
• Section: 37

Judgement Text

, C/ SMC , IN THE INCOME TAX APPELLATE TRIBUNAL C/SMC BENCH, CHENNAI . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER I.T.A.NO.103 /MDS./2017 ( ASSESSMENT YEAR : 2013-14) MR.PRADEEP KUMAR MOHATA , 146,SYDENHAMS ROAD, PERIYAMET, CHENNAI 600 003. VS. THE INCOME TAX OFFICER, CORPORATE WARD -5(4), WANAPARTHY BLOCK, CHENNAI-34. PAN AETPM 2470 H ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : MR.ANANDD BABUNATH , C.A / RESPONDENT BY : MR.V.SREENIVASAN, JCIT, D.R ! ' / DATE OF HEARING : 22.06.2017 #$%& ! ' /DATE OF PRONOUNCEMENT : 24.07.2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-5, CHENNA I DATED 10.11.2016 PERTAINING TO ASSESSMENT YEAR 2013-14. ITA NO. 103/MDS/2017 2 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS FOR A DJUDICATION. 1. FOR THAT THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) CIT (A) WAS PASSED WITHOUT FULLY CONSIDERING THE FACTS AND CIRCUMSTANCES INVOLVED IN THE CASE. 2. THE CIT (A) FAILED TO APPRECIATE THAT THE APPELL ANT RECEIVED THE INCOME FROM BUSINESS IN WHICH THE BORROWED MONIES WERE INV ESTED BY WRONGLY APPLYING THE SECTION 71(1) OF THE INCOME TAX ACT 19 61. 3. THE CIT (A) FAILED TO APPRECIATE THAT THE APPELL ANT HAD WRONGLY FILED THE ITR 3 BY ADJUSTING THE INTEREST PAID AGAINST THE IN COME FROM OTHER SOURCES WAS NOT CONSIDERED WHILE DISPOSING THE APPE AL. 4. THE CIT (A) FAILED TO APPRECIATE THAT THE MEMO O F TOTAL INCOME WAS ERRONEOUSLY PRESENTED AND THE NEXUS BETWEEN THE SOU RCES OF BORROWINGS WERE ONLY INVESTED INTO ASSET REPRESENTED AS CAPITA L INVESTMENT IN THE PARTNERSHIP FIRM AND WAS DISREGARDED AT THE TIME OF CONFIRMING THE ADDITIONS BY THE LD. AO. 5. WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) FAIL ED TO APPRECIATE THAT THE APPELLANT HAD SUBMITTED THE REQUIREMENTS TO ESTABLI SH THE BORROWINGS MEANT FOR INVESTMENT INTO BUSINESS INTERESTS. 6. WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) FAIL ED TO APPRECIATE THAT DISREGARDING THE CLAIM OF INTEREST PAID WHICH SHOUL D HAVE BEEN ALLOWED UNDER SECTION 37 AS AGAINST THE SECTION 57 WHICH WA S WRONGLY CLAIMED UNDER ITR 3 BY THE APPELLANT WAS INVOLUNTARY. ITA NO. 103/MDS/2017 3 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS AN INDIVIDUAL DERIVING INCOME FROM SALARY AND INCOME F ROM OTHER SOURCES. DURING THE ASSESSMENT PROCEEDINGS, IT IS S EEN FROM THE STATEMENT OF TOTAL INCOME THAT THE ASSESSEE HAS REC EIVED INCOME FROM SALARY AND INCOME FROM OTHER SOURCES. THE ASSE SSEE PAID INTEREST OF ` 5,02,628/-. DETAILS FOR WHICH SHOWN AS UNDER, UNDER THE HEAD INCOME FROM OTHER SOURCES: INCOME FROM OTHER SOURCES : ` I) INTEREST FROM SAVING BANK A/C 14,746/- II) INTEREST FROM PARTIES 19,857/- III) TOTAL 34,603/- IV) LESS: INTEREST PAID (-)5,02,628/- V) BALANCE 4,68,025/- THE AO ASKED TO SUBSTANTIATE THE CLAIM OF ` 5,02,628/- U/S.57 AGAINST THE INCOME FROM OTHER SOURCES WITH DOCUMENTARY EVID ENCES. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD PAID INTEREST OF ` 5,02,628/- TO THE LOAN CREDITOR WHICH WAS SET OFF F ROM THE INCOME OF SAME INCOME GROUP I.E. INCOME FROM OTHER SOURCES AND BALANCE ` 4,68,025/- WAS SET OFF AGAINST THE INCOME FROM BUSI NESS AND PROFESSION. THE ASSESSEE IS THE PARTNER OF M/S. PRIMAA MARKETING CORPORATION AND EARNED INCOME OF ` 7,06,905/- FROM THE BUSINESS. ITA NO. 103/MDS/2017 4 U/S.71(1) OF THE ACT LOSS UNDER ANY SOURCE FALLING UNDER ANY HEAD OF INCOME OTHER THAN CAPITAL GAIN IS TO BE SET OFF A GAINST INCOME FROM ANY OTHER SOURCES ANY OTHER HEAD OF INCOME IN THE S AME ASSESSMENT YEAR. THE AO OBSERVED THAT FOR EARNING INTEREST OF ` 34,603/- [(I) + (II) )] THE ASSESSEE HAS CLAIMED DEDUCTION U/S.57(III) O F RS.5,02,628/-, WHICH IS NOT COMMENSURATE. IN THE ABSENCE OF SUBSTA NTIAL EVIDENCE FOR CLAIMING SUCH HUGE DEDUCTION, THE AO DISALLOWED THE DEDUCTION CLAIMED U/S.57(III) OF THE ACT. AGGRIEVED BY THE OR DER OF LD. ASSESSING OFFICER, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 3.1 DURING THE FIRST APPELLATE PROCEEDINGS, THE AS SESSEE SUBMITTED THAT THE AO DISALLOWED THE INTEREST OF ` 5,02,628/- TO LOAN CREDITORS. THE ASSESSEE BORROWED THE FUNDS TO INVE ST IN FIRM, PRIMAA MARKETING CORPORATION WHERE HE IS A PARTNER. ON CON TRARY, THE AO HAS PRESUMED THAT THE LOAN WAS TAKEN TO EARN THE IN COME FROM INCOME FROM OTHER SOURCES. THE ASSESSEE HAD PRODU CED CONFIRMATIONS FROM LOAN CREDITORS BEFORE THE AO, WH ICH WAS NOT CONSIDERED AS EVIDENCE OF PAYMENT OF INTEREST. THE ASSESSEE HAD SET OFF ` 34,603/- FROM INCOME FROM OTHER SOURCES AND BALANCE ITA NO. 103/MDS/2017 5 ` 4,68,025/- FROM INCOME FROM BUSINESS AND PROFESSIO N. FURTHER, LD.A.R SUBMITTED BEFORE LD.CIT(A) THAT U/S.71(1) OF THE ACT, THE NET RESULT FOR ANY ASSESSMENT YEAR IN RESPECT OF ANY SO URCE FALLING UNDER ANY HEAD OF INCOME, OTHER THAN CAPITAL GAINS, IS A LOSS, THE ASSESSEE SHALL BE ENTITLED TO HAVE THE AMOUNT OF SU CH LOSS SET OFF AGAINST HIS INCOME FROM ANY OTHER SOURCE UNDER THE SAME HEAD. 3.2 LD.CIT(A), AFTER PERUSING THE CONTENTION OF LD .A.R AND MATERIAL ON RECORD, OBSERVED THAT THE ASSESSEE BORR OWED THE FUNDS TO INVEST IN FIRM, PRIMAA MARKETING CORPORATION WHERE HE IS A PARTNER. ON CONTRARY, THE AO HAS PRESUMED THAT THE LOAN WAS TAKEN TO EARN THE INCOME FROM INCOME FROM OTHER SOURCES. HOWEVE R, IN THE RETURN OF INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES , THE ASSESSEE DISCLOSED INCOME TOTALING TO ` 34,603/- (INTEREST FROM SB A/C ` 14,746/- + INTEREST FROM PARTIES ` 19,857/- ) AND CLAIMED EXPENDITURE OF ` 5,02,628/- AS INTEREST PAID. ACCORDING TO LD.CIT(A) , THE ASSESSEE DID NOT FILE ANY EVIDENCE TO PROVE THAT WHAT WAS DI SCLOSED IN THE RETURN OF INCOME WAS NOT CORRECT. THEREFORE, LD.CIT (A) REJECTED THE ITA NO. 103/MDS/2017 6 CLAIM OF ASSESSEE. AGAINST THE ORDER OF LD.CIT(A), NOW THE REVENUE/ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US, THE LD.A.R SUBMITTED THAT THE ASSESS EE BORROWED A SUM OF ` 46,26,796/- FROM VARIOUS PARTIES AND INVESTED AN A MOUNT OF ` 28,96,389/- IN PRIMAA MARKETING CORPORATION AND PAI D INTEREST OF ` 5,02,628/-. IT IS ALSO SUBMITTED THAT THE ASSESSEE PAID INTEREST OF ` 5,02,628/- TO THOSE PARTIES, WHO IS LENDING MONEY T O THE ASSESSEE. THE ASSESSEE RECEIVED ` 2,06,950/- FROM PRIMAA MARKETING CORPORATION AS INTEREST ON CAPITAL OF ` 7,06,950/-. ACCORDING TO HIM, THE BORROWAL OF FUNDS FROM THE VARIOUS PARTIES IS F OR THE PURPOSE OF BUSINESS AND SUCH INTEREST EXPENDITURE IS TO BE ALL OWED WHILE COMPUTING THE INCOME UNDER THE HEAD BUSINESS. 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE IN COME OF THE FIRM IS NOT TAXABLE, IT IS EXEMPTED U/S.10(2A) OF T HE ACT. HENCE, SEC.14A IS APPLICABLE AS EXPENDITURE IS NOT RELATIN G TO EARNING OF TAXABLE INCOME. ITA NO. 103/MDS/2017 7 6. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE CONTENTION OF THE LD.A.R IS THAT THE A SSESSEE HAS MADE INVESTMENTS IN THE PARTNERSHIP FIRM OUT OF BORROWIN G MONEY FROM THE VARIOUS PARTIES AND SEC.14A CANNOT BE APPLIED TO TH E FACTS OF THE PRESENT CASE. IT IS ALSO SUBMITTED THAT THE ASSESSE E, IN ADDITION TO SHARE OF PROFIT FROM THE FIRM, ALSO RECEIVED INTERE ST ON CAPITAL FROM THE FIRM AND ALSO SALARY FROM THE FIRM, WHICH WERE TAXA BLE UNDER THE HEAD INCOME FROM BUSINESS. BEING SO, THE INTEREST PAI D BY THE ASSESSEE TO BE SET OFF AGAINST THE INTEREST AND SALARY RECEI VED FROM THE FIRM. ADMITTEDLY INTEREST RECEIVED FROM THE FIRM ON CAPIT AL IS TAXABLE IN THE HANDS OF ASSESSEE UNDER THE HEAD INCOME FROM BUSIN ESS OR PROFESSION. HENCE, INTEREST PAID BY THE ASSESSEE ON BORROWINGS USED FOR INVESTMENTS IN THE FIRM AS CAPITAL TO BE A LLOWED U/S.36(1)(III) OF THE ACT. FOR THIS PURPOSE, WE PLACE RELIANCE ON THE DECISION OF DELITE ENTERPRISES (P.) LTD., VS. INCOME TAX OFFICE R IN [2008] 22 SOT 245 (ITAT[MUM]) WHEREIN HELD THAT THE INTEREST PAID BY THE PARTNERS ON FUNDS BORROWED FOR INVESTMENTS IN FIRM IS ALLOWA BLE U/S.36(1)(III) OF THE ACT, SINCE THE INTEREST RECEIVED FROM FIRM IS T AXABLE AS BAS INCOME U/S.28(V) OF THE ACT. HOWEVER, IT CANNOT BE SET OF F OUT OF SALARY ITA NO. 103/MDS/2017 8 RECEIVED FROM FIRM IS WITH REGARD TO SKILL AND WORK MAN EXERCISED BY THE ASSESSEE. I PLACED RELIANCE IN THE ORDER OF TRI BUNAL, SPECIAL BENCH IN THE CASE OF DHARMASINGH M. POPAT VS. ACIT IN [2010] 2 ITR (TRIB) 586 (ITAT[MUM]) WHEREIN HELD THAT SALARY BY A PARTNER FROM FIRM, WHICH IS ALLOWED AS DEDUCTION IN THE HANDS OF THE FIRM HAS TO BE TAXED AS BUSINESS INCOME OF THE PARTNER. SEC.10(2A) PROVIDED FOR AN EXCLUSION OF SHARE OF PARTNERSHIP FIRM FROM THE TOT AL INCOME IN THE HANDS OF THE PARTNER, BUT SALARY ISSUED BY THE PART NER FROM THE FIRM IS TO BE ASSESSED AS DEEMED BUSINESS INCOME IN THE HAN DS OF SUCH PARTNERS. IN VIEW OF THE SPECIFIC PROVISION OF SEC. 28(V) OF THE ACT, IT IS TAXABLE. THUS, THE NATURE OF SALARY VIS--VIS SHARE OF PROFIT IS OF NO SIGNIFICANCE. HENCE, IN MY OPINION, IF THE ASSESSEE IS ABLE TO ESTABLISH THE NEXUS BETWEEN BORROWED CAPITAL AND IN VESTMENT IN PARTNERSHIP FIRM, THE CLAIM OF ASSESSEE TO THE EXTE NT TO BE ALLOWED, AS HELD BY THE TRIBUNAL IN THE CASE OF D.J. MEHTA VS. INCOME TAX OFFICER IN [2007] 104 ITD 527 (ITAT[MUM]. ACCORDI NGLY, WE REMIT THE ISSUE IN DISPUTE TO THE FILE OF LD. ASSESSING OFFIC ER WITH A DIRECTION TO THE ASSESSEE TO ESTABLISH THE NEXUS BETWEEN BORROW INGS AND INVESTMENT TOWARDS CAPITAL AND ALSO ASSESSEE HAS TO SHOW THE ITA NO. 103/MDS/2017 9 RECEIPT OF INTEREST ON CAPITAL EMPLOYED BY THE ASSE SSEE IN THE FIRM AND TO THAT EXTENT OF INTEREST, THE CLAIM OF DEDUCT ION OF PAYMENT OF INTEREST TO BE ALLOWED. ACCORDINGLY, THIS ISSUE IS REMITTED TO FILE OF LD. ASSESSING OFFICER FOR FRESH CONSIDERATION. 7. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JULY , 2017. SD/- ( ) ( CHANDRA POOJARI ) /ACCOUNTANT MEMBER CHENNAI, DATED THE 24 TH JULY, 2017 . K S SUNDARAM. ' ( )!*+ ,+%! / COPY TO: 1 . / APPELLANT 3. ' ' -! () / CIT(A) 5. +0 1 )!)23 / DR 2. / RESPONDENT 4. ' ' -! / CIT 6. 1 45 6 / GF